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Sunday, January 17, 2010

Goldman Sachs Group Inc. (NYSE: GS), the fifth-biggest U.S. bank by assets, is scheduled to release its fourth quarter earnings for 2009 before the opening bell on Thursday, January 21, 2010. Analysts, on average, expect the company to report earnings of $5.19 per share on revenue of $9.75 billion. In the year ago period, the company reported net loss of $4.97 per share on negative net revenue of $1.58 billion. In the previous three quarters, GS has beaten Wall Street estimates by huge margins, reporting increasing EPS in every quarter.

Goldman was not hurt as much as its peers during the financial crisis, in part because it limited its exposure to risky bets on subprime mortgages. In October, the New York-based company reported that its third quarter net earnings nearly quadrupled $3.03 billion, or $5.25 a share, from $845 million, or $1.81 per share, in the year-earlier period. Quarterly net revenues, including net interest income, climbed to $12.37 billion from $6.04 billion last year. Analysts, on average, expected the company to report earnings of $4.24 per share on revenue of $11.02 billion.

Net revenue in Fixed Income, Currency and Commodities (FICC) was $5.99 billion in the third quarter, up from $1.59 billion a year earlier. The increase reflects strong performances in credit products and mortgages, which were significantly higher compared to a difficult third quarter of 2008.

Goldman Sachs returned 21.4% on its equity in third quarter compared to 7.7% in the year-ago quarter.

The company has benefited from an uptick in merger and acquisition activity in past months. In 2009, the firm advised on 244 deals valued at $548 billion, according to data compiled by Mergermarket. The firm was ranked second in mergers and acquisitions league tables of 2009, behind Morgan Stanley. However, falling debt trading volumes is a major concern as it had been the banks' key profit engines in the previous quarters. Goldman almost gets half its “core revenue” from fixed income and commodities and currency. Recently, Citigroup analyst Keith Horowitz downgraded Goldman's stock citing a slowdown in FICC -- fixed-income, currency and commodities trading. "Our analysis points to a substantial decline in FICC trading in the fourth quarter of 2009, and then we are looking for industry fixed income trading to fall 15%-20% in 2010," Horowitz wrote in a note to clients. "We expect 2011 revenues to also be under pressure due to the impact of regulatory reform, which we see negatively impacting FICC revenue growth by 5%-10% in 2011," he added.

Similarly, Barclays analysts Roger Freeman and Eric Bertrand said they expect equity trading to fall 7% due to lower activity in exchange-traded funds and in the financial stocks. The firm previously expected a 6% rise. The analyst also lowered fixed-income expectations to 7% growth, down from 14%.

Thus in retrospective, it appears that the investors are cautious ahead of announcement as a slump in fixed income volume could significantly impact the fourth quarter earnings. The company's stock currently trades at a forward P/E (fye 28-Nov-10) of 8.87 and PEG ratio (5 r expected) of 0.77. In terms of stock performance, Goldman Sachs shares have gained nearly 129% over the past year.

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